VZCZCXRO4769
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #1259/01 1790825
ZNR UUUUU ZZH
R 270825Z JUN 08
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 9407
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHBK/AMEMBASSY BANGKOK 8469
RUEHKO/AMEMBASSY TOKYO 2154
RUEHBJ/AMEMBASSY BEIJING 5169
RUEHBY/AMEMBASSY CANBERRA 2695
RUEHUL/AMEMBASSY SEOUL 4699
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHRC/USDA FAS WASHDC
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 03 JAKARTA 001259 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR OES AND EAP 
OES/ENV FOR JBENFORADO, HLEE 
USTR FOR MLINSCOTT, DBROOKS 
USAID FOR ANE, EGAT 
BANGKOK FOR RDM/A 
NSC FOR CEQ CONNAUGHTON, VAN DYKE 
USFS FOR CMACKIE 
USDA/FAS FOR OSTA, OCBD, OCRA/RIKER 
 
E.O. 12958: N/A 
TAGS: EAGR EAID ENRG KGHG SENV PGOV ID
SUBJECT: INDONESIA - SUSTAINABLE PALM OIL PRODUCTION 
 
REF: STATE 065271 
 
¶1. (SBU) Summary.  While unrestrained oil palm expansion is a 
potential threat to Indonesia's forests, the right kind of oil palm 
production also presents an opportunity.  Increasing palm oil 
production can be an important vehicle for economic development and 
rural poverty reduction.  The USG can help tackle the lack of forest 
governance and capacity on land use planning, which are the 
fundamental failings that have led to many of the environmental 
problems associated with palm oil.  The USG can also provide 
industry-specific technical assistance, helping the industry meet 
recently-enacted sustainability criteria and to establish a training 
institution to nurture sustainable practices for the long term. 
However, this profitable industry should be able to shoulder the 
burden of developing its industry in a sustainable fashion.  End 
Summary. 
 
The Status of Oil Palm Production in Indonesia 
--------------------------------------------- - 
¶2. (U) Indonesia is the world's largest palm oil producer (45 
percent of global production), with increasing acreage and 
increasing industry sophistication. In the 2007/2008 marketing year 
(MY), USDA estimates crude palm oil (CPO) production will increase 
by 4.5 percent to 18.7 million tons, as acreage expansion from 5 
years ago comes into production.  Forecast production in 2009 will 
approach 20 million tons.  According to the Indonesia Palm Oil 
Commission, there were 6.8 million hectares under oil palm 
cultivation in 2007, with associated revenues of $7.4 billion. 
 
¶3. (U) The combined capacity for biofuel using palm oil as a feed 
stock in Indonesia is 1.7 million tons per year and the country 
exported an estimated 300,000 tons in 2007, according to data from 
the Indonesian Biofuel Producers' Association.  Indonesian 
production of the other principal biofuel, ethanol, was 
approximately 140 million liters in 2007, with a government target 
of 3.77 billion liters by 2010.  Biodiesel production in 2007 was 
approximately 1.55 billion liters, with a target of 5.57 billion 
liters by 2010. 
 
¶4. (U) Palm oil is the most traded vegetable oil in the world. 
Supply and price of the world's most productive oilseed crop have 
significant impacts on food and industrial use including that for 
bio-fuel.  The industry is of interest to the U.S. due to palm oil's 
role in food and feed stocks and the environmental impact of oil 
palm plantations.  Palm oil is a critical element of the foreign 
trade balance of Indonesia, and will earn an estimated $13.5 billion 
in foreign exchange in 2008. 
 
¶5. (SBU) The palm oil industry is the most viable agricultural 
production industry in Indonesia.  However, many firms operate 
quietly because of the negative environmental attention the industry 
has faced recently.  The highest net worth individuals and many 
powerful political figures in the country are involved in the 
industry.  Prominent U.S. firms also have a stake in Indonesian oil 
palm.  They include Cargill, which operates a couple of plantations 
in Indonesia, and ADM, which owns a stake in Wilmar International, 
the largest palm biodiesel manufacturer in the world and probably 
the largest oil palm plantation operator in Indonesia. 
 
¶6. (U) Indonesian industrial domestic consumption is forecast to 
decrease and, despite the hype about biofuels, Indonesian biodiesel 
producers cannot cost-effectively process CPO into biodiesel because 
of the high cost of CPO.  There were 17 Indonesian biodiesel 
producers that reportedly suffered $300 million in losses in 2007. 
This year, state oil firm Pertamina reduced the percentage of 
biofuels in its Biosolar and Biopertamax products from 5 percent to 
2.5 percent and then again to 1 percent due to rising palm oil 
prices and the lack of a mandatory policy or incentives. 
 
¶7. (U) However, domestic demand will grow significantly in the 
medium to long term, if GOI plans to increase biofuels' share of the 
national energy mix to 2 percent by 2010 and 3 percent by 2015 are 
 
JAKARTA 00001259  002 OF 003 
 
 
realized.  To reach this target, the GOI is considering the staged 
introduction of a mandatory biofuel requirement in September 2008, 
starting in Jakarta, with 3 percent of fuel sold consisting of 
biodiesel and/or bioethanol. 
 
Are Sustainable Systems of Production in Place? 
--------------------------------------------- -- 
¶8. (SBU) Lack of forest governance and capacity on land use planning 
has been the fundamental failing that has allowed this trend.  Oil 
palm is a profitable crop which can grow on degraded lands. 
However, it is easier and more profitable to clear natural forests 
(by logging the site, then burning the remaining vegetation) for oil 
palm.    While unbridled oil palm expansion is a threat to 
Indonesia's forests, properly accomplished increases in productive 
capacity also present an opportunity.  Many oil palm companies are 
beginning to respond to criticism -- and worry about market 
pressures -- and are seeking ways to develop plantations in more 
environmentally sustainable ways.  The Roundtable on Sustainable 
Palm Oil (RSPO) demonstrates that there are significant 
opportunities to influence private sector investments in Indonesia's 
oil palm sector, both through keeping up the pressure for more 
sustainable practices, and providing industry with the technical 
guidance it requires. 
 
¶9. (SBU) A promising -- and recent - development is the RSPO 
Executive Board's approval on May 27, 2008 of the Indonesian 
National Interpretation (NI) of RSPO Principles and Criteria (P&C). 
The Indonesia Palm Oil Association (GAPKI), which has effectively 
implemented sustainable palm oil outreach and training, initiated 
the National Interpretation process in July 2006 by establishing a 
Consultative Working Group (CWG).  The CWG submitted the final 
document to RSPO secretariat on November 30, 2007.  Indonesian RSPO 
members held a meeting on June 25, with the theme "Together towards 
sustainable palm oil", to discuss the challenges of RSPO audits and 
the implementation of the RSPO P&C. 
 
¶10. (SBU) RSPO audits are commencing in Indonesia following the 
endorsement of the National Interpretation.  RSPO says that there 
has been progress involving smallholders in the RSPO process, and 
the Indonesian Smallholder Working Group is planning to undertake 
trial audits and trial certification with smallholders in Indonesia. 
 The number of Indonesian producers applying for RSPO membership has 
also been increasing steadily.  Several companies expect to be able 
to meet RSPO standards in the near term.  For the most part, the 
foreign-owned companies have the best chance of meeting the 
standards sooner.  Although some practices could be implemented 
after a plantation is established, many of the principles regarding 
sustainable palm oil involve measures that must be taken while 
establishing the plantation.  This could affect what can be 
considered reasonable expectations for plantations being certified 
as sustainable. 
 
Promoting the Growth and Use of Sustainable Palm Oil 
--------------------------------------------- ------- 
¶11. (SBU) With this in mind, Post recommends: 
-- Sustained (and increased) technical assistance for improving 
forest governance and capacity on land use planning; and 
-- Technical assistance for industry-specific and relevant education 
(and possibly helping to establish an industry research and training 
institution) to nurture sustainable practices for the long term. 
 
Technical Assistance (TA) for Land Use Planning: 
 
¶12. (SBU) The USG already supports forest governance and land use 
planning through multiple agencies.  This should be sustained and 
increased given the scale of the challenge.  In one example of 
current/projected assistance, USAID has reached an agreement with 
the Governor of Papua on the terms of providing assistance for both 
the Integrated Spatial Plan for the Province of Papua as well as for 
biofuels/palm oil.  USAID will assist the Governor in the creation 
of Local Regulations that will determine the process and criteria 
for approval of investment and land use dedicated to sustainable 
 
JAKARTA 00001259  003 OF 003 
 
 
biofuel crops.  This type of activity should be replicated in other 
key provinces of Indonesia. 
 
Education: 
 
¶13. (SBU) The Indonesia Palm Oil Association (GAPKI) is a well 
managed industry association that understands the risks of 
international opprobrium for failure to properly develop 
plantations.  GAPKI is now looking at an industry-sponsored 
technical school or center to train the next generation of leaders 
and managers in the industry and take in-country technical expertise 
to the next level.  The USG could assist this effort, working 
together with GAPKI and RSPO and linking commercial with 
environmental interests.  Any USG participation could hinge on a 
guarantee by large industry players to support the institute and its 
trust fund.  In addition to U.S. companies like ADM and Cargill, we 
could also look to firms such as Dow Chemical that have found high 
value uses of vegetable oils. 
 
¶14. (SBU) With ongoing oil palm expansion, the entry point is the 
industry's need for an educated class of professional technical 
managers, capable of running large-scale agribusinesses in remote 
locations.  The managers must be able to develop and apply agronomic 
skills as well as financial and managerial skills, while taking into 
account environmental sustainability.  (Note: A well-designed school 
or center might be connected to an existing Indonesian agricultural 
university or school, and affiliated with major U.S. university 
programs in vegetable oils and seeds.  End Note.) 
 
 
HUME